Rents for top-grade offices fall

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While the office mkt is a lagging indicator for the general health of the service sector - it remains a good overall indicator. Hence after the stellar yield compression on office REITs this year, it pays to be cautious on further out-performance.

Rents for top-grade offices fall

Published on Dec 29, 2012

AVERAGE rents of Grade A offices in the Central Business District (CBD) declined a modest 0.9 per cent in the fourth quarter, propped up by steady demand amid limited supply, said Savills.

The property consultant noted in a report yesterday that the creme de la creme office space, also known as Grade AAA, in the Marina Bay precinct once again showed the highest quarterly drop of 3.4 per cent to $10 per sq ft (psf) per month. This takes the fall for top-grade office space in Marina Bay to 14.9 per cent for the whole year.

On the other hand, other Grade A building rents softened by 3.3 per cent year-on-year on the back of healthy occupancy rates.

Overall, the monthly rents of all Grade A offices averaged $8.31 psf during the quarter, representing a dip of about 5 per cent from $8.72 psf a year ago.

Meanwhile, vacancy rates for CBD Grade A offices improved to 7.8 per cent from 8.1 per cent in the previous quarter.

Better occupancies were recorded in most areas, except for those around Beach Road and Middle Road as well as in the vicinity of City Hall. Beach Road offices saw vacancy rates edge up 0.5 per cent to 4.2 per cent by the end of this month, while City Hall suffered a sharp deterioration due to the more than doubling of vacant stock after Citibank vacated its premises in Millenia Tower.

Demand for CBD Grade A office space for the full year has been healthy, with a net take-up of almost 1.3 million sq ft.

This is equivalent to all the space at Marina Bay Financial Centre Tower 3 or half of the space at Suntec City office towers.

Savills reckons an uncertain economic outlook for next year will continue to cast a pall over the office leasing market.

A total of about 2.5 million sq ft of office space, mainly from The Metropolis and Asia Square Tower 2, is expected to enter the market next year. So far, these new developments have a pre-commitment level of only about 20 per cent. As a result, the office leasing market is expected to face some challenges when these two developments are completed in the second half of 2013.

On the other hand, office demand for space less than 10,000 sq ft has been, and is expected to remain, sustained. Tenants for such space may come from new set-ups and companies in the resource and business services sectors, said Savills.

"We call these real-economy companies," it said.

Demand for space may also come from tenants relocating from old buildings scheduled for redevelopment in the Robinson Road, Shenton Way and Tanjong Pagar areas in the coming years, like Keppel Towers, GE Tower, Robinson Towers and International Factors Building.

Grade AAA office rents are expected to weaken by a further 5 to 10 per cent next year, said Savills.

"For most of other CBD Grade A buildings, however, rents should stabilise on the back of healthy occupancy levels, with demand coming from real-economy companies."

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